Debts due to a person or business are either good, doubtful or bad. Bad debts are those which appear irrecoverable, or where the estimated cost of recovery is greater than the value of the debt. In preparing accounts they are treated as a loss and written off in the profit and loss account. Bad debts should be carefully distinguished from those which are merely doubtful. The former are known losses and are treated as such; the latter are merely a possible future loss which should be provided against.
|Reference: The Penguin Business Dictionary, 3rd edt.|